When marks meet reality
The Liquidation Stress Test
What happens to "senior secured" lenders when asset-light roll-ups are stressed and liquidated.
"Senior secured" means little when the collateral is leased property with bolted-in equipment. Stress a sponsor's EBITDA and exit multiple even modestly and equity is wiped out; stress them like a real distress event and lenders recover a third of par. Recovery on enterprise value: car wash 10–25¢, software 15–35¢, dental 20–40¢. First-lien recovery fell from 76% (2022) to 39% (2024).
Car Wash
Software / SaaS
Dental / DSO
Try it: the recovery calculator
The default scenario uses a car wash — the poster child of PE roll-up excess (3,500+ new stores since 2020, sale-leasebacks that inflate EBITDA, zero per-site organic growth). Adjust the inputs to see the recovery waterfall.
Illustrative model. Recovery = min(stressed EV, debt) ÷ debt. Equity = max(0, stressed EV − debt).
The recovery waterfall (worked example)
| Metric | Sponsor says | Stressed (−30% / −40%) | Real distress (−50% / −60%) |
|---|---|---|---|
| EBITDA | $50M | $35M | $25M |
| Multiple | 9.0x | 5.4x | 3.6x |
| Enterprise value | $450M | $189M | $90M |
| Debt | $275M | $275M | $275M |
| Equity value | $175M | WIPED OUT | WIPED OUT |
| LTV | 61.1% | >100% | >100% |
| Lender recovery | — | 68.7% | 32.7% |
The page frames this against Ares' claim that private credit is "safer than IG bonds." First-lien recovery rates collapsed from 76% in 2022 to 39% in 2024. Covenant-lite deals jumped from 4% to 21% in two years; 50% of mega-deals over $500M lack financial maintenance covenants entirely.
Frequently asked questions
What is a liquidation stress test?
It applies a downside scenario to a sponsor's EBITDA and exit multiple, then runs the recovery waterfall to show how much lenders actually recover when marks meet reality.
How much do lenders recover when a PE roll-up fails?
For asset-light roll-ups: car wash 10–25¢, software 15–35¢, dental 20–40¢. First-lien recovery overall fell from 76% (2022) to 39% (2024).